12/01/2011

SEC Statement on the Legality of Congressional Insider Trading

The first question is whether the trading, or communicating the information to someone else, breached a duty owed by the Member or staff. Although there is no direct precedent for Congressional staff, there is case law from other employment contexts regardingmisappropriation of information gained through an employment relationship. This precedent is consistent with a claim that Congressional staff, as employees, owe a duty of trust and confidence to their employer and that a Congressional staff member who trades on the basis of material non-public information obtained through his or her employment is potentially liable for insider trading under the misappropriation theory, like any other non-governmental employee.

The question of duty is more novel for Members of Congress. There does not appear tobe any case law that addresses the duty of a Member with respect to trading on the basis of information the Member learns in an official capacity. However, in a variety of other contexts, courts have held that “[a] public official stands in a fiduciary relationship with the United States,through those by whom he is appointed or elected.”15 Commenters have differed on whether securities trading by a Member based on information learned in his or her capacity as a Member of Congress violates the fiduciary duty he or she owes to the United States and its citizens, or to the Federal Government as his or her employer.16

With the Senate Homeland Security and Governmental Affairs Committee set to begin congressional insider trading hearings today, Sen. Kirsten Gillibrand, whose husband trades stock options, has proposed a bill that would legalize, not ban, insider trading by members of Congress.

The controversy surrounding Sen. Gillibrand’s version of the STOCK (Stop Trading on Congressional Knowledge) Act involves a curious omission of a conjunction that CNBC.com editor John Carney calls “shocking” and a “scandal” because it would “gut the law” entirely.

Comments

The first question is whether the trading, or communicating the information to someone else, breached a duty owed by the Member or staff. Although there is no direct precedent for Congressional staff, there is case law from other employment contexts regardingmisappropriation of information gained through an employment relationship. This precedent is consistent with a claim that Congressional staff, as employees, owe a duty of trust and confidence to their employer and that a Congressional staff member who trades on the basis of material non-public information obtained through his or her employment is potentially liable for insider trading under the misappropriation theory, like any other non-governmental employee.

The question of duty is more novel for Members of Congress. There does not appear tobe any case law that addresses the duty of a Member with respect to trading on the basis of information the Member learns in an official capacity. However, in a variety of other contexts, courts have held that “[a] public official stands in a fiduciary relationship with the United States,through those by whom he is appointed or elected.”15 Commenters have differed on whether securities trading by a Member based on information learned in his or her capacity as a Member of Congress violates the fiduciary duty he or she owes to the United States and its citizens, or to the Federal Government as his or her employer.16

With the Senate Homeland Security and Governmental Affairs Committee set to begin congressional insider trading hearings today, Sen. Kirsten Gillibrand, whose husband trades stock options, has proposed a bill that would legalize, not ban, insider trading by members of Congress.

The controversy surrounding Sen. Gillibrand’s version of the STOCK (Stop Trading on Congressional Knowledge) Act involves a curious omission of a conjunction that CNBC.com editor John Carney calls “shocking” and a “scandal” because it would “gut the law” entirely.